Game of Thrones binge-watching helps Tencent beat estimates with US$2.7b third-quarter net profit

The internet giant’s video unit has 43 million paying subscribers, which it claims is the largest in China’s red-hot online video streaming market

PUBLISHED : Wednesday, 15 November, 2017, 10:24pm
UPDATED : Thursday, 16 November, 2017, 2:11pm

It is easy to forget that just a few years ago, millions of mainland Chinese consumers likely got their first taste of Hollywood from buying pirated VCDs and DVDs off roadside pushcarts, as well as from illegal online video streaming websites.

The speed at which these consumers have migrated online, then paying for the right to binge-watch US hit television series like HBO’s Game of Thrones, has helped create a handful of giant players in China’s red-hot online video streaming market.

The biggest of that group is Tencent Video, a unit of Hong Kong-listed internet giant Tencent Holdings, that now boasts 43 million fee-paying subscribers as of September 30. Last November, it had more than 20 million paying customers.

While video streaming giant Netflix had 109.2 million subscribers worldwide at the end of September, Tencent’s video streaming business still has plenty of room to grow in a country with a population of about 1.4 billion and 751 million internet users as of June 30.

Headquartered in the southern Chinese city of Shenzhen, Tencent reported on Wednesday a 69 per cent jump in net profit to 18 billion yuan (US$2.7 billion) in the quarter to September, up from 10.6 billion yuan in the same period last year.

That surpassed the market consensus of a 16.4 billion yuan net profit in the third quarter, according to a Bloomberg survey of analysts’ estimates.

Pony Ma Huateng, chairman and chief executive at Tencent, attributed the gains made last quarter to strong revenue growth across multiple business lines, including games, digital content, online advertising and payment-related services.

Total revenue rose 61 per cent to 65.2 billion yuan from 40.4 billion yuan a year earlier, which was ahead of the consensus estimate of 61 billion yuan.

Tencent reported that its online advertising revenue grew 48 per cent year on year in the third quarter to about 11 billion yuan, lifted by high media advertising on its video streaming platform as subscriptions climbed steadily.

“We believe [Tencent Video] has become China’s top online video platform in terms of mobile daily active users and subscriptions,” said Ma.

The largest players in China’s online video streaming market represent the country’s biggest technology companies: Chinese online search leader Baidu, e-commerce powerhouse Alibaba Group Holding and Tencent, which are collective known by the acronym BAT.

Tencent Video competes against Baidu’s iQiyi and Alibaba-backed Youku Tudou. New York-traded Alibaba owns the South China Morning Post.

Other popular video streaming players on the mainland include Sohu Video, Mango TV, Bilibili and Funsion.

Karen Chan, an analyst at investment bank Jefferies, recently said Tencent Video and iQiyi are poised to further distance themselves from the competition this year.

She pointed out that Tencent Video has benefited from the popularity of exclusively licensed Chinese drama series, such as Nothing Gold Can Stay.

Martin Lau Chi-ping, the president at Tencent, said in a conference call on Wednesday that the firm’s heavy investment in producing original content has generated positive traction and market share.

“We will continue to invest [in original content] in the long run, given that it’s a high engagement product,” said Lau, adding that time spent on its original content is second only to social media.

The company reported total cost of revenue for its so-called value-added business, under which its games, social media and digital content services like Tencent Video are grouped, rose 81 per cent year on year to 33.5 billion yuan. It said the increase was primarily because of greater sharing and content costs, and expenses for payment-related services.

WeChat, Tencent’s vastly popular mobile messaging-social media-and-payments platform known as Weixin on the mainland, reached 980 million users at the end of September, helping drive up use for the company’s digital content business.

As the world’s largest video games company by revenue, Tencent’s third-quarter financial results still showed online games as its main growth driver.

Online games revenue grew 48 per cent year on year to 26.8 billion yuan, driven by Tencent’s popular smartphone game Honour of Kings and new titles, such as the mainland version of Contra Return and Legacy TLBB Mobile.

Tencent has ploughed back plenty of its profits over the years to strengthen its gaming business.

Last year, Tencent ramped up its international video games business with its acquisition of Finnish mobile game developer Supercell Oy for US$8.6 billion.

The transaction represented Tencent’s single biggest investment in a video games company. It also owns significant interests in US developers Riot Games, Epic Games, Glu Mobile and Activision Blizzard; British studios Milky Tea and Frontier Developments; South Korean firm CJ Games; and Japanese company Aiming.